Executive Summary
Delaware’s Court of Chancery ruled in January 2026 that a board’s failure to respond in good faith to credible workplace sexual misconduct red flags can survive a motion to dismiss as a breach of fiduciary duty, and that a CEO who conceals such reports breaches the duty of loyalty. Every Fortune 500 board that lacks a documented response protocol for misconduct escalations now carries a litigation posture it did not have 18 months ago. The recommended posture: close the gap between awareness and documented action before proxy season accelerates derivative plaintiff targeting.
The Signal at a Glance
Chancellor McCormick declined to dismiss fiduciary claims against directors and officers of eXp World Holdings where the board received credible sexual misconduct reports and failed to act with documented good faith.
The Deep Dive
The Signal
On January 16, 2026, Delaware Chancellor Kathleen J. McCormick issued a 90-page opinion in Los Angeles City Employees’ Retirement System v. Glenn Sanford et al., C.A. No. 2024-0998-KSM (Del. Ch. Jan. 16, 2026), denying motions to dismiss filed by directors and senior executives of eXp World Holdings, a cloud-based global real estate brokerage.
The court held that widespread and severe sexual misconduct within a company’s ranks can constitute “corporate trauma” sufficient to support Caremark-based oversight claims when leadership conceals, ignores, or fails to document a response to it. The CEO was separately found to have plausibly breached his duty of loyalty by retaining employees implicated in misconduct reports and withholding information from the board.
The Evidence
Chancellor McCormick identified two independent failure modes. The first: fiduciaries failed to establish the kind of reporting and response systems Caremark requires once the nature and severity of the misconduct pattern became a known risk. The second: the CEO’s alleged concealment of information from fellow directors converted an oversight lapse into a duty-of-loyalty claim, which carries a higher standard of review and no exculpation under Section 102(b)(7).
The case advances the post-McDonald’s (2023) line of authority that treats certain categories of human capital risk as a core compliance obligation rather than a business-judgment matter. The court cited the frequency, severity, and organizational visibility of the allegations as the factors that cleared the pleading bar.
Key facts on the record: multiple employees raised misconduct complaints internally; the company’s response was nominal; the CEO received reports and did not escalate them to the full board. That sequence, the court found, states a viable claim.
The Strategic Implication
Defensive Risk. Any board that has received a credible misconduct complaint through HR, legal, an ethics hotline, or informal escalation, and has not documented a good-faith investigation and board-level response, now carries a Caremark exposure that this opinion confirms survives a motion to dismiss. The critical word is “documented.” Nominal action (an internal review with no record, a verbal assurance, a delayed response) is what the eXp World board was accused of. Audit committees should request a written certification from general counsel that current misconduct-response protocols meet the post-McDonald’s, post-eXp World standard.
Offensive Advantage. Boards that have already built documented escalation protocols, with clear intake channels, defined timelines for board notification, and written records of the board’s deliberation and response, now hold a structural defense that most competitors have not yet built. That gap is narrowing fast. The boards that act this proxy season will have completed the work before plaintiff firms complete their screening of recently disclosed litigation risk factors in 10-K filings.
Tone at the Top
Delaware’s message in 2026 is consistent: the board’s job is not just to govern strategy, it is to govern the organization. The fiduciary floor on human capital oversight is no longer theoretical.